Status of risk managers: A dramatic change in relationships

By Ellen Kelleher
Published: April 15 2005 16:03 | Last updated: April 15 2005 16:03

Six months have passed since regulators first went on a crusade to rid the insurance sector of improper practices and so much has changed. The Greenbergs are no longer the insurance industry’s reigning dynasty. Brokers have stopped accepting kickbacks from favoured insurers.

The accounting practices at American International Group, the biggest insurer in the world, are drawing intense scrutiny and, as regulators uncover more improprieties, companies are leaning on risk managers to assess the quality of their insurance programmes. The profile of these executives - who were once anonymous operators in most organisations - has been raised considerably.

“Chief financial officers are beginning to ask risk managers a lot more questions,” says Andrew Barile, an industry consultant. When Eliot Spitzer, the New York attorney general, sued Marsh, the world’s biggest insurance broker last October, directors and senior managers at Fortune 500 companies put pressure on risk managers to either drop Marsh or justify retaining its services. Risk managers were in the hot seat for failing to pick up on the bid-rigging alleged to have taken place at Marsh.

Most were aware that brokers had been accepting special bonuses from certain insurers and the threat of shareholder lawsuits posed concern. Risk managers ceded considerable control to brokers over the last decade, analysts say. In the 1990s, Marsh and others moved to take a more hands-on approach to the complicated business of structuring policies and began offering a wider variety of services such as risk management, research and consulting. As a result, the role of risk managers became more passive.

But the current investigation has changed the relationship between brokers and risk managers dramatically. Bob Hartwig, chief economist at the Insurance Information Institute, reports that the awareness of risk managers “has increased substantially” in the wake of Mr Spitzer’s investigation. As one analyst says: “The leverage in the relationship has changed. It will never be the same.”

A study by PwC suggests companies should delegate more responsibility to risk managers. Analysts say the most effective ones handle risk modelling strategies and thoroughly evaluate alternative insurance options such as captives in addition to the usual tasks of signing off on standard insurance programmes.

“Everybody involved in monitoring risk of all kinds should have a genuine influence over decision-making,” the PwC report states.

"Scandals have put the spotlight on managers’ roles and reputational risk"

In recent months risk managers have begun to ask tough questions about fees and commissions and how brokers place coverage. “What used to happen is brokers and risk managers would meet for dinner and later risk managers would write letters authorising brokers to place the coverage. Now the process is becoming a lot more formal. The bar has been raised because directors and senior managers are demanding it,” says Mr Barile. One reason why ties between risk managers and brokers were close was that modestly-paid risk managers often defected to brokers in search of higher salaries. Leaving for brokerages often allowed them to double or triple their pay.

“In recent years, their compensation hasn’t reflected their contribution to corporations,” Mr Barile says. Some predict risk managers will be paid more as their duties expand.

“There’s potential for higher rewards. Many businesses have become very aware of the importance of these jobs,” Mr Hartwig says. The Public Risk Management Association, (Prima) a US trade group for risk managers, reports a surge in interest in its training programmes. Among other things, the group tries to educate risk managers in the public sector about insurance markets and alternative risk financing. It suggests companies recruit managers with business degrees or graduate degrees in public administration and risk management.

“The role of the risk manager has evolved over the last couple of years and become more sophisticated. And all the regulatory issues have emphasised why the profession is so important,” says Jim Hirt, Prima’s executive director. The importance of hiring risk managers first rose to prominence following the attacks of September 11, 2001. “Since September 11, more companies and municipalities have begun to come to Prrima for educating on risk management,” Mr Hirt says. Following the September 11 attacks, the market hardened and prices rose. Risk managers were under pressure to try to control these costs. Risk managers were making some of companies’ most important decisions between the years 2000 and 2003 when the market hardened,” Mr Hartwig says.

Enron, WorldCom and other corporate scandals have also put the role in the spotlight as companies struggle to figure out how to handle the threat of reputational risk. The net result of these scandals has been new regulation. After the passage of the Sarbanes-Oxley act, companies are taking it upon themselves to interpret rules in the strictest possible way to avoid further potential problems. But for risk managers, this comes at a potential cost. They have complained the focus on box-ticking compliance with the new rules can act as a sort of tax and leaves them with less time to guard against less quantifiable threats, such as risk to reputation.